January 2006

For years, dire warnings have sounded about an impending defense budget "train wreck" that would inevitably result from mounting Pentagon financial commitments against a backdrop of spending cuts.

The looming train wreck has not yet happened, but pundits, legislative leaders and analysts are beginning to talk about it.

Substantial growth in defense spending after 9/11 gave the Pentagon's budget a reprieve. The day of financial reckoning, however, may fast be approaching if the current state of the nation's balance sheet offers any clues.

Today, the United States is saddled by a large national debt and a rising deficit. Even if increases to military spending were to end immediately, an explosion in the growth of entitlement programs -- especially Social Security and Medicare -- will be very difficult to manage with 78 million baby boomers slated to retire in the coming decades.

Without fundamental reforms, the nation is headed for economic collapse, cautioned David Walker, the U.S. comptroller general. "We could be doing nothing more than paying interest on federal debt in 2040," he told lawmakers.

Just this month, outgoing Federal Reserve Chairman Alan Greenspan expressed concern that failure to deal with the exploding budget deficit would not only affect the United States but also the global economy.

As to what this means specifically for the Defense Department, the answer is that a funding derailment will occur sooner than later.

The much talked-about October memo from acting Deputy Defense Secretary Gordon England called for $32 billion in spending cuts ($7.5 billion in 2007) during the next six years.

But if we are to believe the dire predictions from Walker and Greenspan, it is clear that even a $32 billion cut hardly will make a dent.

Consequently, there could be more blood letting down the pike. Some defense industry experts have estimated the Defense Department could see a reduction of as much as $13 billion to $15 billion in 2007, alone. However, as long as we are engaged in Iraq, our troops will get the best our government and industry can provide. So while reductions might be on the horizon, the administration and Congress will be very careful with any reductions and how they are taken.

In their quest for cost savings, Pentagon planners will be looking at three broad spending areas: personnel, operations and maintenance, and procurement.

Personnel accounts -- particularly in the Army and the Marine Corps -- will be tough to cut, as long as we have troops committed in Iraq and Afghanistan. But both the Navy and the Air Force are expected to draw down their forces to some degree. The Air Force already has begun efforts to reduce the ranks by 30,000, noted several media reports. And the Navy will be down one aircraft carrier group -- and associated personnel and equipment -- after it decommissions the USS Kennedy.

Down the line, even the Army could see personnel reductions once it begins a phased withdrawal from Iraq, possibly next year.

The operations and maintenance account, meanwhile, also will be tough to cut as long as we sustain our current deployments. The stress on equipment will require billions of maintenance and repair dollars for years to come.

With the cost of the war exceeding the $300 billion mark, it would be fair to predict that budgetary pressures could well become a factor in future decisions to withdraw from Iraq.

Procurement accounts, in the near term, could become bill-payers. While no major programs are expected to be eliminated wholesale, there will be all-around trimming in procurement, research, development and engineering programs. This tactic, known informally as "salami-slicing," is frequently how the Defense Department gets around making tough choices. They cut a little piece off everything, and by doing so, they push every program's schedule to the right. By all estimates, it is not a good technique for solving budget problems.

From a political standpoint, it is always tough to cut a major military program that provides thousands of jobs around the country. From a financial and management perspective, however, it makes more sense to cut some programs, especially those still in early stages of development for which research-and-engineering dollars have not been committed.

As we await next year's proposed budget and the results of the Quadrennial Defense Review, there are many more questions than answers.

Regardless of what happens to the 2007 budget or the thrust of the QDR, our concern in the defense industry is to have healthy, robust programs that are adequately funded and support well-equipped forces. If cuts must be made to procurement programs, they should be made in a sensible manner, so that we do not end up with hollowed-out forces and procurement programs stretched so thin that they lack value.

In summary, any cuts now are sure to be very carefully calibrated. A number to watch is the 2007 budget authority, to be released shortly after Congress passes the 2006 budget. Compare the 2007 number to the 2007 line in the national defense budget estimates for 2006. That number today is $445 billion. This comparison, the breakdown of accounts, and comparisons with out-year numbers will give you a good idea of where we are headed with future defense budgets.